We take an in-depth look at mortgage underwriting and what you need to know
What is underwriting in mortgage?
Underwriting in mortgage is a part of a process that is muddy for a lot of borrowers. The reason for this is that home loan applicants don’t usually understand what the underwriter is seeking while they decide on whether or not to approve you.
The underwriter, as a member of the mortgage team, will look at your personal financial information to see if it satisfies the mortgage lender’s criteria, matching the requirements of the sort of loan you are applying for. The mortgage underwriter will be specifically looking for your tax returns, a verification of employment, your recent pay stubs, your W-2s, permission to pull credit, and a copy of government issued ID.
The underwriter will review each of these documents to determine the level of risk involved in loaning you the money you require for your mortgage. The truth is, how likely you are to be able to make mortgage payments on time—and eventually repay the mortgage in full—is more of an educated guess based on your assets, your income, and your credit history.
One of the downsides to underwriting is that a lot of companies handle the process after you have found the property you want to purchase, have already placed a bid, and then applied for a mortgage. The issue is that you could actually lose out on your would-be home if the underwriter takes too long in deciding or if you take too long to supply the right information.
What are the three Cs of mortgage underwriting?
The three Cs of mortgage underwriting are capacity, credit, and collateral. A mortgage underwriter gathers and reviews your necessary documents and information before evaluating income, credit and payment history, and available assets for a down payment. The underwriter then categorizes those findings into the Cs, which break down as follows:
Capacity. Comparing your total monthly recurring debts and your monthly gross income, the underwriter will analyze your ability to repay a loan. The figure that results from the underwriter’s calculation is called the DTI, or debt-to-income ratio. Your RRSP, bank statements and more will also be taken into account.
Beyond your current obligations, the underwriter is attempting to verify that you have enough funds to cover future mortgage payments. They also want to make sure you have the liquid cash at hand to make a down payment. If the underwriter finds that you don’t, you could be asked to pay monthly private mortgage insurance, or PMI, in addition to interest and principal.
Credit. To ensure you were able to pay your previous debts, underwriters analyze a credit report from credit reporting agencies. At this point, underwriters will have a better understanding of your credit, what the terms were, how much you took on, and any red flags about your potential to repay the loan.
Gathering that information will allow the underwriter to determine the kind of loan that will work best for you, what the interest rate could be, or the reasons you might be denied. A good credit history is one of the most crucial factors in receiving good mortgage terms.
Collateral. In the event that you default on your loan, the lender will look to any collateral to hedge their bets. Lenders usually determine a loan-to-value ratio, or LTV, after ordering a home appraisal to verify the home’s value, rather than simply the amount of the loan.
The LTV ratio is calculating by dividing the number by the appraised value or the purchase price—which is lower. The LTV also plays a role if you want to refinance a mortgage or hope to borrow against the equity if you want to build a home. It is important to know that LTVs can vary, depending on the type of mortgage.
How long does it take an underwriter to approve a mortgage?
It takes an underwriter anywhere from 11 to 25 days to approve a mortgage in Canada. After the pre-approval stage, wherein the lender will decide they are okay to support your purchase and you have a home, you move into the official approval stage, which can be quite time-consuming since it involves underwriting conditional commitments processing, documents, and the mortgage transaction.
When you line up a home, you and your broker signal to the lender to start the underwriting process, which is when the lender reviews how likely it will be for you to meet your mortgage approval requirements based on credit cards and debt, tax returns, and your credit bureau report, among others. The approval process is similar to the pre-approval process, except that the banks provide official confirmation.
Can a mortgage fall through during underwriting?
Yes. Among the reasons a mortgage can fall through during underwriting are: your credit history or score is unacceptable, your application is incomplete or information cannot be verified; you have too much debt versus what you earn; the home’s appraisal or condition does not support the sales price; you are unable to verify the money for your closing costs or your down payment; or you are unable to prove that your employment history or your income is stable.
